Challenges to JCC Pricing in Asian Markets - IEE JAPANeneken.ieej.or.jp/data/5419.pdf · OXFORD...
Transcript of Challenges to JCC Pricing in Asian Markets - IEE JAPANeneken.ieej.or.jp/data/5419.pdf · OXFORD...
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Challenges to JCC Pricing in Asian LNG Markets Professor Jonathan Stern Chairman and Senior Research Fellow Natural Gas Research Programme
IEEJ SEMINAR, TOKYO, MARCH 18, 2014
IEEJ: March 2014. All Rights Reserved.
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WE ARE:
•A gas research programme at a Recognised Independent
Research Centre of Oxford University, specialising in fossil fuel
research
•Probably the only European academic research group focussed
on natural gas.
WE PRODUCE: independent research on national and international
gas issues
WE ARE FUNDED BY: sponsorship by 20 companies and
governments in gas producing and consuming countries
WE ARE NOT:
• consultants, sellers of exclusive, high price business reports
WWW.OXFORDENERGY.ORG/GAS-PROGRAMME/
OIES Natural Gas Research Programme
In 2013 the Oxford Institute was voted the world’s No.1 Energy
and Resource Policy Think Tank http://gotothinktank.com/dev1/wp-content/uploads/2014/01/GoToReport2013.pdf
IEEJ: March 2014. All Rights Reserved.
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http://www.oxfordenergy.org/2014/02/challenges-to-jcc-pricing-in-asian-lng-markets-2/
Published 3rd February 2014 – Free to Download
IEEJ: March 2014. All Rights Reserved.
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5
10
15
20
25Ja
n-0
7
Jul-
07
Jan
-08
Jul-
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Jan
-09
Jul-
09
Jan
-10
Jul-
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Jan
-11
Jul-
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Jan
-12
Jul-
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Jan
-13
Jul-
13
$/m
mb
tu
SOURCE: Platts, EIA, Argus, Own Analysis
Henry Hub
NBP
Europe Oil
Indexed
Contract
estimate:
Asian LNG
Spot
Average Japan
LNG Price
Brent
Before
concessions
After
concessions
(estimate)
Asia pays very high prices for LNG imports
IEEJ: March 2014. All Rights Reserved.
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What’s the Problem?
• Oil price linkage was introduced in the 1970s when
oil was the main competing fuel to natural gas in
Japanese power generation
• The cost pass-through mechanism allows Japanese
utilities to adjust their gas and power tariffs to end
users by the same percentage as the country’s
average LNG procurement cost movements,
regardless of an individual buyer’s actual purchase
costs
• Projects “need oil linked prices” to support new LNG
supply
But, post-Fukushima, a new mood/new fundamentals;
Japanese utilities begin to make substantial losses
IEEJ: March 2014. All Rights Reserved.
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Japan: 10 Largest Power Company Financials – very
big losses!
-25,000
-20,000
-15,000
-10,000
-5,000
-
5,000
10,000
FY2000
FY2001
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
Pro
fit/
Loss
in Y
ear
, US$
Mill
ion
s
TEPCO
Okinawa
Kyushu
Shikoku
Chugoku
Kansai
Hokuriku
Chubu
Tohoku
Hokkaido
Source: http://www5.fepc.or.jp/tok-bin-eng/kensaku.cgi
IEEJ: March 2014. All Rights Reserved.
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What is the main problem related to pricing:
is it price level or price formation?
• Is the problem that prices are too high? If so
the problem is price level
• Or is the problem that prices no longer have
any market logic? If so the problem is price
formation
Reducing the price level is a short term solution,
but in the longer term only a change in price
formation will solve the current problem
IEEJ: March 2014. All Rights Reserved.
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If the problem is the price level –
what could be done?
• Reduce the base price
• Reduce the slope
• Adjust the “kink points” of the S-curve
• Repeat the above as often as required…
What does this achieve: it reduces the level of
the price, but maintains the JCC mechanism.
But if oil prices continue to rise then constant
adjustment is required
IEEJ: March 2014. All Rights Reserved.
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If the problem is price formation – what is
the way to approach the problem?
Reassess the market for gas, what fuels (energies)
compete with natural gas
Assess whether interfuel competition is still operating
and in which part of the market?
• If yes, a mix of oil products/coal/ power base price and
index may work
• If no, then the market will need to move to a spot/hub
gas index eg:
– JKM or similar and related to this
– Henry NBP (plus liquefaction and transport costs)
– A hub price: physical, virtual, located in Asia
The aim of the process is a price which keeps LNG/gas
competitive nationally and globally
IEEJ: March 2014. All Rights Reserved.
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China illustrates the differences between JCC,
oil-indexation, alternative fuel and hub pricing
• Pipeline imports from Central Asia and Myanmar (and negotiations
with Gazprom) are oil-indexed
• LNG prices are JCC-based
• Post-2011 price reform aims at hub pricing at Shanghai citygate,
based on an average of gas import and alternative fuel pricing
Central Asia
2020: 50bcm
2030: 80bcm
Russia East
2020: ?
2030: 38bcma
Russia Altai
2020: 0
2030: 30bcm?
Myanmar
2020:12bcm
2030:12bcm
China Domestic
2010: 100bcm
2020: 150bcm
2030: 250bcm
LNG
2010: 10bcm
2020: 70bcm
2030: 120bcm
Source: BP Statistical Review 2013, Author’s estimates
IEEJ: March 2014. All Rights Reserved.
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Price Formation Option 1:
alternative fuel pricing
ADVANTAGES:
• Reflect current energy market conditions which can be monitored over time
• Should never get substantially out of line with competing fuels
DISADVANTAGES:
• Competitive fuels difficult to agree with sellers
• Needs frequent re-calibration as market and fuel mix evolves.
• May be only a transitional stage to spot/hub prices
Does interfuel competition have a market logic; in which countries and which sectors?
If not, the only alternative is supply/demand pricing of some sort
IEEJ: March 2014. All Rights Reserved.
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Price Formation Option 2:
Spot and Futures Pricing
Spot LNG Price Index (eg JKM):
•Advantage: reflects current Asian LNG supply/
demand balance
•Disadvantages:
– too few cargoes (at least currently) on which to base long
term contracts
– May reflect global, rather than Asian, market dynamics
Futures Market Pricing (announced by Japanese
government in April 2013) – but this needs a physical
basis
This would become much more credible if spot and
short term trade increases; liquidity is insufficient on
which to base a futures price
IEEJ: March 2014. All Rights Reserved.
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Spot LNG Volumes
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50
100
150
200
250
2006 2007 2008 2009 2010 2011 2012
BC
MA
'Spot Traded' LNG
Short Term Contracts
Medium & Long Term Volumes
Toal LNG Supply
Asia
0
50
100
150
200
250
300
350
2006 2007 2008 2009 2010 2011 2012
BC
MA
'Spot Traded' LNG
Short Term Contracts
Medium & Long Term Volumes
Toal LNG Supply
Global
Source: GIIGNL, Author’s Analysis
In 2012, Spot LNG Cargoes
Represented 19.5% of Global
LNG Volumes
In 2012, Spot LNG Cargoes
Represented 19.1% of Asian
LNG Volumes
IEEJ: March 2014. All Rights Reserved.
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Option 3: Henry Hub/NBP-based pricing
ADVANTAGES:
•Established hub price mechanism, no suspicion of manipulation by Asian stakeholders
•Currently lower price than JCC
DISADVANTAGES:
•risky if HH prices rise significantly above $6/Mmbtu
(and oil price falls)
•No Asian market fundamentals
Henry Hub/NBP pricing risks being a short term device
to reduce price level, not a long term solution to the
price formation problem; cold weather in US in Feburary
2014 illustrates how HH prices can increase
IEEJ: March 2014. All Rights Reserved.
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Price Formation Option 4:
Pricing at an Asian Hub
ADVANTAGES:
•Provides on-going price reference which can evolve
from physical trade into a hedging/risk management
reference with a range of durations
•Can be a physical or virtual location
PROBLEMS: needs many (all?) market players to
agree on:
•location – each country wants its own hub
•liquidity acceptable as price reference
•rules – trading/financial regulation
This will take national/regional agreement and time to
establish
IEEJ: March 2014. All Rights Reserved.
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• Asian and particularly Chinese Natural Gas and LNG demand.
• Continued robustness of US shale gas production and scale of US LNG exports.
• Scale and pace of non-US LNG export supply (especially Australia, East Africa, Russia, Canada).
• Shale gas outside North America (post 2020/2030?)
• Russian strategy for price versus volume for pipeline supply in Europe (and Asia)
Uncertainties in Global Dynamics Post 2015
Drivers for change
IEEJ: March 2014. All Rights Reserved.
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Drivers for Change: LNG Supply 2005 – 2025
(Excluding Possible US & Canadian Projects)
Source: Waterborne LNG, D. Ledesma, Own Analysis
0
100
200
300
400
500
600
700
800
900
1000
2004 2009 2014 2019 2024
BC
MA
Further East Africa &OtherTanzania
Mozambique
Russia
Australia
Nigeria
Yemen
USA - Kenai
Trinidad
Qatar
Peru
Papua New Guinea
Oman
Norway
Malaysia
Libya
Israel
Iran
Indonesia
Eq. Guinea
Egypt
Canada
Cameroon
Brunei
Brazil
Abu Dhabi
Angola
Algeria
Existing & Low Risk
Risked @ 50%
Unrisked
IEEJ: March 2014. All Rights Reserved.
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• Co-incidence of North American Exports with next
increase of global LNG supply (Australia, East Africa,
etc) may lead to a new ‘glut’ or at least a ‘softer’ LNG
market.
• In part this will be fostered by LNG aggregators /
portfolio players all targeting (finite) Asian LNG
demand.
• It will also depend on how much Russian pipeline gas
and LNG export capacity is developed and by when
• In addition to the assumed continued robustness of US
production this also depends on growth of Chinese
demand for LNG
Global LNG Fundamentals:
major uncertainties for Asia
IEEJ: March 2014. All Rights Reserved.
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0
0
20
40
60
80
100
120
2010 2015 2020 2025
BC
MA
Golden Pass
Cameron LNG
Dominion Cove Point
Lake Charles
Freeport
Sabine Pass
US LNG Export Projects
with secured off-take
Capacity Ownership
* Assumes BG Retains 100% of Lake Charles
Sources: Company & Media Reports,
Author’s Assumptions
Note that US LNG
exports are relatively
limited prior to 2019-20.
This is a big
uncertainty for LNG
supply
0
20
40
60
80
100
120
2010 2015 2020 2025
BCM
A
Aggregator
India
South Korea
Japan
IEEJ: March 2014. All Rights Reserved.
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Nat
ura
l Gas
Re
sear
ch P
rogr
amm
e Russian LNG and Pipeline Gas Export Projects
to Asia are Potentially Important
The ending of Gazprom’s monopoly on LNG
exports at the end of 2013 indicated government
support for 3rd party exporters – Rosneft and
Novatek are actively competing with Gazprom for
customers
Yamal LNG – 16.5mmt
CNPC - 3mmtpa
Negotiations with European
and Asian traders Sakhalin 1 – 5mmt
SODECO – 1mmtpa
Marubeni – 1.25mmtpa
Vitol – 2.75mmtpa
Sakhalin 2 – 10mmt
Various Asian buyers -
expansion agreed
Vladivostok LNG
– 10-15mmt
Chayanda
Kovykta
38bcma
to China?
Pechora LNG
– 2.6mmtpa ?
Leningrad LNG
– 10mmtpa ?
Gazprom
Novatek
Rosneft
S-K
-V
Shtokman
- 15mmtpa in
Phase 1?
Source: OIES
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The Power of Siberia Pipeline and VLNG
Terminal ~ $80-90bn
21
Source OIES
Economics of Vladivostok LNG depend on “Power of
Siberia” Pipeline Gas Exports to China
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Russian pipeline gas exports could cut
Chinese LNG import requirements by
40 Bcm/year in the 2020s
22
Source: Henderson and Stern/OIES
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0
20
40
60
80
100
120
140
160
2010 2015 2020 2025
BC
MA
Contestable Demand
Spot Transactions
Short Term Contracts
Existing M & LT Contracts - HH
Existing M & LT Contracts - JCC
Historic M & LT Contract Imports
LNG Demand
LNG Demand (without RussianPipeline)
0
5
10
15
20
25
30
2010 2015 2020 2025
BC
MA
Contestable Demand
Spot Transactions
Short Term Contracts
Existing M & LT Contracts - HH
Existing M & LT Contracts - JCC
Historic M & LT Contract Imports
LNG Demand
0
5
10
15
20
25
30
35
40
45
50
2010 2015 2020 2025
BC
MA
Contestable Demand
Spot Transactions
Short Term Contracts
Existing M & LT Contracts - HH
Existing M & LT Contracts - JCC
Historic M & LT Contract Imports
LNG Demand
0
10
20
30
40
50
60
70
80
2010 2015 2020 2025
BCM
A
Contestable Demand
Spot Transactions
Short Term Contracts
Existing M & LT Contracts - HH
Existing M & LT Contracts - JCC
Historic M & LT Contract Imports
LNG Demand
0
20
40
60
80
100
120
140
2010 2015 2020 2025
BC
MA
Contestable Demand
Spot Transactions
Short Term Contracts
Existing M & LT Contracts - HH
Existing M & LT Contracts - JCC
Historic M & LT Contract Imports
LNG Demand
Asian LNG Importers: spot, short term and long term
contracts 2010 - 2025 Japan
China
India
South Korea
Taiwan
Source: GIIGNL, D. Ledesma, Rogers and Stern 2014
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Future Asian LNG Demand and Contracts:
spot, short term and long term
Sources: GIIGNL, Rogers and Stern 2014
0
50
100
150
200
250
300
350
400
450
2010 2015 2020 2025
BC
MA
Spot Transactions
Short Term Contracts
US Sourced - Agrregators
US Sourced - Asian Buyers
Existing LT Contracts - JCC
Historic LT Contract Imports
LNG Demand
LNG Demand (without RussianPipeline Imports to China)
The Asian LNG market could become very competitive in the late
2010s and early 2020s; China is a big uncertainty for LNG demand
IEEJ: March 2014. All Rights Reserved.
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A Future Asian LNG Hub: Singapore, Shanghai
or Tokyo?
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Asian LNG Hub – Three Stages of Development ?
Spot LNG
Imports
End-Users of LNG
Mid-Stream
Incumbent
Incumbent-
owned LNG
Import
Terminal
JCC-indexed
LNG Contract
Blended
Import Price
Current Situation
End-Users of LNG
Mid-Stream
Incumbent
Incumbent-
owned LNG
Import
Terminal
JCC-
indexed
LNG
Contract
Blended
Import Price
Situation Post 2016
HH plus
margin-
indexed
LNG
Contract
Spot LNG
Imports
End-Users of LNG
LNG Import
Terminal with
3rd Party
Access.
JCC-
indexed
LNG
Contract
Blended
Import Price
Situation Post 2020?
HH plus
margin-
indexed
LNG
Contract
Spot
LNG
Imports
Mid-
Stream
Incumbent
Hub-based
price
Source: Rogers and Stern/OIES
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Costs are a major problem for new LNG projects
Source: Deutsche Bank Markets Research, Global LNG, 17 September 2012
Commercial “train wreck” approaching for some Australian projects?
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LNG Plant Cost ($/TPA) by Year of start-up
28
200% increase
2005-2012
Data Courtesy GIIGNL/Wood MacKenzie
Average
Average
Songhurst/OIES: 2014
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Data Courtesy of GIGNL, Wood Mackenzie, Published Reports
Recent LNG Costs – High and Low Cost Locations
Songhurst/OIES, 2014
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• Utilisation of barge-mounted liquefaction plant built in
China or Korea. This cost of this concept has been
quoted at $600-700/TPA including storage
• For onshore constructed plants using a more
competitive process and EPC contractors.
• Bringing in a competitor to GE/Nuovo Pignone (who
currently have an exclusive supplier position) for
refrigeration compressors and drivers. Other major
vendors include Siemens, Dresser, Rolls Royce for
different components
• Cooperation between the owners of different projects
in the same area to get better value from the synergies.
This is being applied in Mozambique where Anadarko
and ENI are now planning a joint development.
SOURCE: MAJOR CONCLUSIONS FROM SONGHURST/OIES
Possible Areas for Future LNG Cost Reduction
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Asian LNG: Scenario1. Contractual Impasse
• Buyers continue to complain about JCC pricing but
there is little change in the status quo. No changes
can be agreed in existing contracts.
• Buyers refuse to sign new long term contracts at
prices linked to crude oil; producers refuse to go
ahead with new projects on any other price basis,
and no new LNG contracts are signed.
• Spot trade increases with US LNG export growth but
the problems of price competitiveness (on average
LNG import prices) mean that Asian LNG trade
stagnates.
IEEJ: March 2014. All Rights Reserved.
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Asian LNG: Scenario 2. Smooth Contractual Transition
• New contracts start to be signed with a mix of oil, Henry Hub and NBP prices, with price review clauses which mandate renegotiation of prices after a number of years, anticipating the creation of an Asian hub.
• There are challenges to existing contract prices, but renegotiations result in adjustments which are tolerable for both buyers and sellers with no fundamental changes or litigation. Despite losses, Japanese buyers “hang on” until their existing long term contracts begin to expire/decline.
• Spot trading increases significantly and a hub price begins to emerge during the 2010s, initially in Singapore.
• By the 2020s, larger and more liquid hubs emerge in Tokyo and Shanghai and new contracts with buyers in those countries are priced on this basis.
IEEJ: March 2014. All Rights Reserved.
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Asian LNG: Scenario 3. Contractual Train Wreck
• For Japanese LNG buyers losses from existing contracts become
financially untenable and they demand price renegotiations.
• These are resisted by suppliers with new, high cost new projects
coming on stream which need to pay back substantial investments
and feel unable to compromise on the JCC-related prices in their
contracts.
• Litigation ensues with unpredictable results. The process
highlights the need for a “reset” in the commercial framework.
• A several year period of commercial upheaval ensues during
which no new contracts are signed other than with North American
sellers…
• but spot and short term trading continues to increase and as in the
Smooth Commercial Transition scenario, a hub price emerges in
Singapore, followed by larger and more liquid hubs in Tokyo and
Shanghai and new contracts with buyers in those countries are
priced on this basis.
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Asian LNG: Scenario Conclusions
• In all three scenarios, new contracts are signed with North
American sellers on a Henry Hub price basis, but this introduces
another risk for buyers that such prices do not reflect evolving
market fundamentals in the Pacific region.
• We do not believe that `Contractual Impasse’ is a sustainable
scenario but it remains a possible outcome if parties are unable to
reach agreement, at least for a few years.
• The `Smooth Contractual Transition’ scenario is clearly the most
desirable outcome to move from the JCC status quo to hub-based
pricing. However, it depends on maintaining a controllable
financial situation for buyers and sellers.
• The `Contractual Train Wreck’ scenario results from the financial
position of buyers (and/or sellers) becoming untenable. All Asian
LNG stakeholders must clearly be hoping this does not occur but...
• markets where prices have liberalised and hubs have been created
– North America, UK and Continental Europe – have had
“contractual train wrecks” of varying magnitudes.
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Most Difficult Problems to Resolve
• Threat to traditional “relationship culture”
between buyers and sellers
• Lack of third party access to pipelines/
liquefaction terminals
• Dominant (monopoly?) players in all Asian
countries
• Potentially greater price volatility
• Traditional “security culture” of Asian buyers:
– Absolute assurance of demand coverage through
long term contracts, replaced by greater short
term/spot purchase
– Not a problem as long as buyers offer the highest
price, but no reason to offer several $/MMbtu more
than necessary
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• JCC is no longer a rational basis for pricing Asian LNG;
threatens competitiveness of economics
• Key question is ‘what is the most appropriate basis on
which to price LNG, which reflects Asian market
fundamentals and is most ‘future-proof’?
• One or more Asian LNG trading hubs are the longer
term solution to prices which reflect market
fundamentals; establishing these hubs create difficult
problems for both buyers and policymakers, especially..
• addressing the challenges of existing Long Term JCC
contracts for high cost projects which have not yet
commenced delivery
Summary of the Problems Facing JCC
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FINAL THOUGHTS
• This is likely to be a very difficult and painful
transition which may take at least a decade to
complete
• The solution may be different for different
Asian LNG importing countries
• Oil prices will continue to play a role in
determining LNG prices but this will not be a
contractual requirement
• There is no guarantee that hub-based prices
will always be lower than JCC prices (but with
oil prices above $100/bbl this is likely)
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Thank you for your attention
This presentation is based on the following published research:
The Impact of a Globalising Market on Future European Gas Supply
and Pricing: the Importance of Asian Demand and North American
Supply’ Howard Rogers, January 2012,
http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/01/NG_59.pdf
A realistic perspective on Japan’s LNG Demand after Fukushima.
Akira Miyamoto, Chigako Ishiguro, Mitsuhiro Nakamura. June 2012
http://www.oxfordenergy.org/2012/06/a-realistic-perspective-on-
japan%E2%80%99s-lng-demand-after-fukushima/
The Pricing of Internationally Traded Gas, Editor Jonathan Stern
OUP/OIES 2012.
Challenges to JCC Pricing in Asian LNG Markets, Howard Rogers &
Jonathan Stern, February 2014.
http://www.oxfordenergy.org/2014/02/challenges-to-jcc-pricing-in-asian-lng-
markets-2/
The potential impact on Asian gas markets of Russia’s Eastern Gas
Strategy, James Henderson and Jonathan Stern, February 2014.
http://www.oxfordenergy.org/2014/02/the-potential-impact-on-asia-gas-
markets-of-russias-eastern-gas-strategy/
IEEJ: March 2014. All Rights Reserved.
Contact: [email protected]